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Thursday, May 29, 2014

In mature market economies competition produces inequality

Energetic changes during an economic cycle

The causes of inequality throughout history can be easily explained by the class system, lack of access to education, information, healthcare, infrastructure, safety, which accumulates wealth in few hands. Today, the root causes of inequality are beginning to be addressed in most parts of the world, yet global income inequality has risen between early 1800 to 2000 by more than 20 %. A viable theory to explain changes in inequality throughout history, which appearssurprisingly similar in most countries all over the world, is missing. Quoting Frank Cowell of the London School of Economics and Political Science, "Giving up explaining the exact shape of the income distribution decades ago, economists estimate inequality using only raw data, and don't depend on knowing the distribution's precise mathematical form." In my earlier blog, 'Is increasing inequality inevitable consequence of economic progress?' a new evolution hypothesis is proposed, which applies for economies as well as societies. During an economic cycle the inequality initially is ameliorated, but intensified as the economic cycle matures. In fact, the increasing inequality contributes to the collapse of the cycle. Here I will elaborate further on the exact causes of inequality and the structure of the economic cycle. Economies actually form self-regulatory systems. Economies constantly strivetoward energy neutrality, but true energy neutrality can be only found in the middle of the cycle. At the beginning of the cycle superfluous resources and human enthusiasm mean energy surplus, which drives the cycle. The third phase of cycle is ruled by shortage of resources and dispirited attitude, which hasten the demise of the cycle. Energy shortage, degradation and demoralized population coalesce in chaos, the cycle collapses.

First phase: Economic cycles begin on the decimated remnants of the previous cycle (A). Even though economic cycles inevitably end in chaotic upheavals, revolutions, or even wars, the intellectual, scientific advances of the previous era is widely available within the system and makes economic renewal possible. The few companies, economic entities that survived the upheaval receive great boost from the growing need for goods and services. New companies, new industries are ushered in, thriving on the emerging buying power of citizenry. Unemployment plummets. Competition is small or non existent, as the buying power often eclipses the ability of companies to satisfy it. The intellectual and technological capital from the previous cycle serves as indirect energy input (energy surplus) that drives progress and decreases entropy. The society moves toward democratization and equality. The system is not energy neutral.

Second phase: As the manufacturing is scaled up in every sector due to demand, the market gradually saturates and competition for customers comes to dominate. The system's energy balance is neutral. This is the start of the second phase of the economic cycle (B). Due to competition, differentiation of companies begins in earnest and the prices of goods and services diverges. Divergence in buying power increases economic inequality. The interactions among the system's constituents increases disorder (entropy).

Third phase: As the economy matures, the third phase of the cycle is characterized by entropy production (C). The phase is characterized by shortage of raw materials, and social degradation as the economy overgrows its boundaries and destroys the environment that supports it. Companies unable or unwilling to innovate are forced into bankruptcies, leading to massive unemployment. The system's energy balance becomes tilted again (there is an energy shortage), and entropy increases as society moves toward chaos and economic breakdown. The economy is on an irreversible path toward a singularity that marks the end of the economic cycle. The accumulated anger, dissatisfaction of the people leads to uprisings, revolutions and chaos. Today the world economy is kept humming through continuous intervention by major governments. Can these interventions avoid chaos, or just postpone it? The answer to this question and lots of other information about social changes can be found in the third chapter of my book, The Science of Consciousness.